What Role is There For High Dividend Stocks?

[Doug1]

I favor a total stock market approach, and have avoided a focus on high dividend stocks. IIRC, DFA published data showing that dividend investing is a form of value investing, and not the best form.

However, I was wondering whether high dividend stocks have a place for income investors, especially those in retirement. I'm not suggesting that a retiree shouldn't have a healthy exposure to bonds. I'm wondering whether stock market exposure should focus solely on a total stock market approach, or whether there should also be a focus on high dividend stocks. I believe that DFA discourages investment in hybrid asset classes. I believe that the thinking is that hybrid asset classes don't provide adequately increased return for the increased risk taken. Does this apply to high dividend stocks? Would an income investor be better off sticking to a stock market index approach along with bonds, and not have increased exposure to high dividend stocks? Such thinking would appear to go against conventional wisdom; a common reason given for investing in stocks, like utilities, is the increased income. I believe that Fama-French also found that low beta stocks tend to have lower volatility, relative to their return, than the market in general. I wouldn't be surprised if low beta stocks tend to be high dividend stocks.

[norookie]

FWIW Doug1, , IMHO like others here advocate, after accumulation stage, simplify. You want some dividend players stick with indexes or a etf. Remember the 09 crash when certain banks I recall went under 5.00 that used to be bouncing between 40/60 or higher? I do. They paid great dividends too.

[MP173]

If you want dividend stocks, do your homework. There are a number of blog/websites that are all about dividend paying stocks. You can always go with a dividend centric mutual fund or etf.

Do not buy a stock because it has a high dividend, but it because it is a GREAT COMPANY. Get in the mindset if and when you purchase stocks that you are buying companies. If you are buying mutual funds, you are buying management's ability to select companies for ownership.

Often that will mean, in the case of index funds, the management is saying we cannot do better than the market, therefore we buy the market.

This goes against the current here, but I believe there is a place for ownership of companies in one's overall portfolio.

Ed

[DaveS]

In one of Larry Swedroe's blogs over at BNET he cited a study that showed that higher dividend stocks return less than the total market. You can also get the picture by going to a site like CNN and running a comparison graph of the returns of DVY and VTV. Both are Value, but the dividend oriented fund under performed over time.

So stick to the Boglehead asset classes, or slice and dice, but dividend paying stocks are not a separate asset class.

I also agree that total return may not be as important to a retired person who might need the income to stay off a dog food diet. Dave

[infecto]

If you want dividend stocks, do your homework. There are a number of blog/websites that are all about dividend paying stocks. You can always go with a dividend centric mutual fund or etf.

Do not buy a stock because it has a high dividend, but it because it is a GREAT COMPANY. Get in the mindset if and when you purchase stocks that you are buying companies. If you are buying mutual funds, you are buying management's ability to select companies for ownership.

Often that will mean, in the case of index funds, the management is saying we cannot do better than the market, therefore we buy the market.

This goes against the current here, but I believe there is a place for ownership of companies in one's overall portfolio.

Ed

Never buy a stock because its a great company. That is the worst mindset when purchasing individual companies. There can be great great companies that are bad stocks. Being a great company can be part of the model but hardly has significant weighting.

[Kevin M]

I also agree that total return may not be as important to a retired person who might need the income to stay off a dog food diet. Dave

Dave, I don't get that. Seems to me that total return is all that matters. I can generate income by selling equities if I need to.

Having said that, having fairly steady dividend and interest income makes me more comfortable (I'm retired), especially when stocks tank.

[at]

+1 for dividend stocks ETF.

I intend to stick to a dividend-based ETF during my retirement instead of the annuity approach.

Dividends has a track record of being stable compared to stock prices and that's the biggest plus point for me during retirement when I badly need to depend on a steady stream of income.

[grayfox]

double

[grayfox]

However, I was wondering whether high dividend stocks have a place for income investors, especially those in retirement. I'm not suggesting that a retiree shouldn't have a healthy exposure to bonds. I'm wondering whether stock market exposure should focus solely on a total stock market approach, or whether there should also be a focus on high dividend stocks.

If you get lucky and pick the right stocks it can be great.
If you get unlucky and your stocks cut their dividends, not so great.

As Dirty Harry said, "Do you feel lucky?"

[BruceM]

I also agree that total return may not be as important to a retired person who might need the income to stay off a dog food diet. Dave

Dave, I don't get that. Seems to me that total return is all that matters. I can generate income by selling equities if I need to.

Your investment objective really depends on what you're trying to accomplish.

For most retirees, their investment objective is income, not total return (TR). TR is one way to provide income, but its not the only way.

Having said that, having fairly steady dividend and interest income makes me more comfortable (I'm retired), especially when stocks tank.

And this is one of the distinct advantages to a retiree to invest for a reliable income stream through income (dividend, interest and distributions) paying securities. The other advantage is that you don't have to concern yourself with what to sell and when to sell it.

The trade-off is you need to get good at picking securities that will sustain and grow their distributions. Diversification here is critical...not for purposes of fluctuation share prices...but for consistency in distributions.

Today, ETF's like VIG make this much easier. DVY, which I believe was fairly heavily invested in bank stocks, saw their distributions reduced by about 30% from 2008 to 2009, whereas VIG's distribution dropped by only -4.6% over the same period. This is why diversification across multiple asset classes of dividend paying stocks is so important.

BruceM

[Noobvestor]

Keeping the fireplace piping hot this winter! [note: this will not work if you have opted to receive electronic notifications instead of paper ones]

[nisiprius]

Some think dividends are a simple metric that tells you something or other about management and is a criterion for picking stocks. I think that's the only valid reason today for focussing on high-dividend-paying stocks. Other than as a stock-picking theory, I think the concept of "high-dividend-paying stocks" is outdated.

I think it's a hangover from the days when most people invested in individual stocks rather than mutual funds, and commissions were fixed by the NYSE and were high. And I mean high, like ten times higher than today. My vague recollection is that it cost about $100 to trade a "round lot" (maybe $5000 worth). Odd lots (less than 100 shares) were even higher, though that was concealed in the bid-asked spread.

That meant you could not conveniently invest small amounts, and you could not conveniently liquidate small amounts. The only income you could easily get from a stock was the actual dividend payments themselves that the stock happened to be paying out. You could not adjust things except by choosing stocks whose dividends happened to match the amount you wanted to withdraw.

In those days, building a portfolio involved other considerations than total yield. In the early accumulation stages, people selected "growth stocks" that paid low or no dividends. In retirement, people would select "high-dividend stocks" because they wanted the income and the only good way to get it was to pick stocks that actually paid high dividends. And, understandably, such people were very interested in the regularity of dividend-paying history.

Today, you can invest for total return, and how much of that happens to be dividends doesn't matter at all. You can instruct Vanguard to withdraw precisely $123.45 a month from your VTSMX and they will do it, and it doesn't cost you a dime in commissions. Maybe $98.76 of that is dividends and $24.69 is from sale of shares, maybe it's the other way around, doesn't matter.

[Taylor Larimore]

Hi nisiprius:

Today, you can invest for total return, and how much of that happens to be dividends doesn't matter at all.

Vanguard Research agrees with you:

Spending From a Portfolio: Implications of a Total-Return Approach Versus an Income Approach for Taxable Investors

[Ron]

Some think dividends are a simple metric that tells you something or other about management and is a criterion for picking stocks. I think that's the only valid reason today for focussing on high-dividend-paying stocks. Other than as a stock-picking theory, I think the concept of "high-dividend-paying stocks" is outdated.

I agree with your analysis/comments.

One area that looks at high-dividend returns are those that have entered retirement. For some reason, I read a lot about folks that while in the accumulation stage, remain total return investors but when entering retirement, become dividend only investors.

I don't know if it's a mindset of not touching principal while in retirement or the reluctance of managing your retirement income strictly from the sale of holdings.

There's a lot of discussion on the M* IDR forum (Investing During Retirement) on this subject with many "truths" being discussed.

For myself? I have no problem with remaining a total return investor in retirement, and no fear in selling (to restock my cash bucket) to ensure a constant stream of income (remember, cash flow is everything).

One thing about dividends. They are not always "given", but in many cases remain part of retained earnings on the balance sheet. Assuming it is thought the companies (or series of companies in a mutual fund) are valuable, those retained earnings become "visible" by the increase in value of the holdings. For me, it's a case of pay me now (dividends) or pay me later (retained earnings reflected in value of stock/funds).

It's all a matter of your individual desire and decision on how these earnings will be harvested, IMHO.

- Ron

[Sidney]

Today, you can invest for total return, and how much of that happens to be dividends doesn't matter at all.

Unless these are in a taxable account. Then it might matter.

[Taylor Larimore]

Today, you can invest for total return, and how much of that happens to be dividends doesn't matter at all.

Unless these are in a taxable account. Then it might matter.

Hi Sidney:

You are correct. We much prefer taking withdrawals from our taxable account because only the profits are taxed--and at low capital-gain rates.

Another advantage is that because our taxable account holds mostly tax-efficient (low dividend) stocks, our withdrawals automatically make our portfolio more conservative with age.

Caveat: At death, our stock holdings, unlike our Traditional IRAs, will pass to beneficiaries free of income and capital-gain taxes.

[Ron]

Caveat: At death, our stock holdings, unlike our Traditional IRAs, will pass to beneficiaries free of income and capital-gain taxes.

I just wanted to mention an "exception to the rule" (for the many readers of this forum), and our specific case.

Since the vast majority of our estate will be going to our named non-profit charities, and assuming the tax laws remain the same (hey, it's a risk, but we won't be around to worry about it), our remainder tax-deferred investments will be passed on with minimum/no tax due.

I know it's not the normal situation for most folks, but it is part of our estate planning, and I just wanted to point out the option.

- Ron

[ResNullius]

This depends on what Congress/Obama does with the current tax rules. Right now, qualified dividends are taxed at no more than 15%. If the rate goes up to that of ordinary income, then the utility of dividends will drop. I'll wait and see before making any changes here.

[nisiprius]

For some reason, I read a lot about folks that while in the accumulation stage, remain total return investors but when entering retirement, become dividend only investors.

I don't know if it's a mindset of not touching principal while in retirement...

Well, that's the conservative thing to do.

I realize, with some shock, that the reason there isn't terribly good guidance on decumulation is that we baby boomers may be the first ones to do it. That is to say, the first large-scale instance in which people of moderate means are attempting to live (in part) off of investments. I'm putting moderate in italics because it means that we--well, I am, anyway--trying to do it with savings that may be marginal for the task.

The plutocrats of the Gilded Age did not even believe in living off the interest; the rule-of-thumb was to live off "the interest on the interest." That guaranteed not only perpetual income, but growth. Unfortunately, while that might have been expected to keep up with inflation, it could not possibly have kept up with "family inflation," i.e. the rate of growth of the family to be supported by the fortune. Nor did it take account of "spendthrift risk" or "risk that the government might pass an income tax!"

Living off dividends may not be that bad a management plan.

I'm thinking much of what I read about funding retirement may be planning assumptions gone mad. What are rough ballpark estimates become givens and guarantees in our thinking. We start by estimating what our expenses are going to be twenty, thirty years from now, and somehow that gets blurred into an assumption that our expenses (in real dollars) will be perfectly level. Then we act as our job were to manage investments to produce a rock-steady level stream of real income.

These assumptions-gone-wild reach their climax in the "consumption-smoothing" approach being advocated by some smart people, in which one's ultimate financial heart's desire is, apparently, the achievement of an absolutely equalized standard of living throughout one's lifetime.

In reality, we spend most of our lifetime earning a fluctuating, unpredictable income, and adjusting our expenses to our earnings, not the other way around, so I don't know why this wouldn't continue in retirement.

So it becomes an exercise in judging what one can afford. And, you know what? "I can afford to spend dividends" is probably a more reliable benchmark than "I can afford to spend 4%-then-COLAed."

P. S. I think "Judging one's financial situation" is an awfully important part of the puzzle. Having "enough" doesn't mean having a certain number of dollars, it means being able to make and act on accurate judgements of what one can afford to spend. I do think one of the unrecognized risks of high stock allocations is that it makes it hard to accurately judge one's progress toward one's savings goal; e.g. it's the year 2000 and you mistakenly think "I've got it made!"

[Doug1]

Thank you for the responses. In retirement, the Vanguard article makes a case for a total return approach, as opposed to an income approach. Vanguard compares high dividend funds to low dividend funds; the conclusion is that the total return of low dividend funds may be greater. However, Vanguard also says:

"In both scenarios, the yields were relatively stable, but the capital returns were volatile."

In other words, dividends are more stable than capital appreciation. Would someone in retirement not sacrifice a small decrease in return for less volatility? The Vanguard article is persuasive, but it doesn't address that question.

[dbr]

In other words, dividends are more stable than capital appreciation. Would someone in retirement not sacrifice a small decrease in return for less volatility? The Vanguard article is persuasive, but it doesn't address that question.

This is a fallacy because you are applying "stability" to two different pieces of total return then trying to compare the two.

If you want stability of withdrawals you can have that trivially by simply withdrawing and spending money on any schedule you want. There is no accomplishment in that.

[dbr]

For most retirees, their investment objective is income, not total return (TR). TR is one way to provide income, but its not the only way.

I would think that survival of the portfolio that is generating the income would be the first priority of any retiree. That is determined by the relative balance between withdrawal and returns in sequence. What fraction of total return is delivered in interest and dividends is irrelevant to that problem unless high income investments have a superior property in portfolio survival to low income investments, a premise that is almost certainly false.

[dbr]

[
So it becomes an exercise in judging what one can afford. And, you know what? "I can afford to spend dividends" is probably a more reliable benchmark than "I can afford to spend 4%-then-COLAed."

It is a more or less reliable benchmark depending on whether or not said dividends are more or less than 4% COLAed. There is no mystery in successful retirement based on relying on dividends to spend almost nothing of one's portfolio, other than the mystery of how one should have that much money or that little desire to spend.

[Ron]

Would someone in retirement not sacrifice a small decrease in return for less volatility? The Vanguard article is persuasive, but it doesn't address that question.

Speaking only for me (and my wife), we are fortunate since we were able to "overfund" our retirement accounts (e.g. estimated income vs. expenses through age 100).

While someone in retirement, who has a "moderate" income plan may want to use a dividend income approach, there are others that don't necessarily need this level of "insurance" and are willing to go with total return (as we do).

Again (as in all other subjects), it depends on your specific situation. If we assume total vs. dividend are "equal" (it just depends where the dividends are distributed/retained), than those that need a "base" in retirement may opt for a dividend approach, vs. us that don't necessarily look for an extreme level of safety.

It leads me to question if there isn't any difference in practice; you use the "tool" that makes sense, in your own personal situation. Nothing more than that.

- Ron

[dbr]

Would someone in retirement not sacrifice a small decrease in return for less volatility? The Vanguard article is persuasive, but it doesn't address that question.

Speaking only for me (and my wife), we are fortunate since we were able to "overfund" our retirement accounts (e.g. estimated income vs. expenses through age 100).

While someone in retirement, who has a "moderate" income plan may want to use a dividend income approach, there are others that don't necessarily need this level of "insurance" and are willing to go with total return (as we do).

Again (as in all other subjects), it depends on your specific situation. If we assume total vs. dividend are "equal" (it just depends where the dividends are distributed/retained), than those that need a "base" in retirement may opt for a dividend approach, vs. us that don't necessarily look for safety.

It leads me to question if there isn't any difference in practice; you use the "tool" that makes sense, in your own scenario.

- Ron

The "safety" of the plan is dictated by the withdrawal rate, not by whether or not the investments payout higher or lower fractions of interest and dividends. It is, of course, granted that IF a dividend approach dictates lower withdrawal rate than some other plan for setting withdrawal rate does, then probably it is safer, but there is no mystery in that.

By the way, the safest withdrawal plan, which also supports the highest income, is to annuitize. That also reduces investment volatility to zero which should be comfortable for both those who pay no attention to principal and those who fear volatility. The discussion of agency risk in insurance companies is acknowledged in advance.

[KyleAAA]

IIRC, DFA published data showing that dividend investing is a form of value investing, and not the best form.

Very important distinction: no DFA study "shows" that dividend investing is a poor form of value investing. It merely says that in the sample they back-tested, it didn't seem to work very well. That doesn't mean it didn't work, it just means they couldn't attribute any outperformance to the strategy using the data they had. It also doesn't mean it won't/can't work in the future. Using the same sample set you used to generate a hypothesis as "proof" the hypothesis is correct is a rookie mistake. That is not a scientific test.

[Wagnerjb]

Speaking only for me (and my wife), we are fortunate since we were able to "overfund" our retirement accounts (e.g. estimated income vs. expenses through age 100).

It does other investors no good to attribute your situation to being "fortunate". Ron - undoubtedly, you made an awful lot of intelligent decisions along the way. Undoubtedly, you made an awful lot of sacrifices along the way. Don't sell yourself short.

We can teach others how to make intelligent financial decisions. We can teach them how to make the necessary sacrifices. The more good decisions and sacrifices investors make, the less impact any "fortune" might have on their retirement success.

Best wishes.

[Ron]

The "safety" of the plan is dictated by the withdrawal rate.

Only if measured against the total withdrawal years. Don't believe that if your plan is measured against a 4% withdrawal rate on year one of retirement is of any consequence if you have additional sources of income along the way.

Maybe this is a discussion for another thread, but too often I see references to withdrawal rates (especially in early retirement situations) that in reality, don't meet facts (as I have found over the past few years).

- Ron

[dbr]

The "safety" of the plan is dictated by the withdrawal rate.

Only if measured against the total withdrawal years. Don't believe that if your plan is measured against a 4% withdrawal rate on year one of retirement is of any consequence if you have additional sources of income along the way.

Maybe this is a discussion for another thread, but too often I see references to withdrawal rates (especially in early retirement situations) that in reality, don't meet facts (as I have found over the past few years).

- Ron

Of course one has to consider the actual evolution of the situation. In a thread like this a bald reference to "withdrawal rate" is a shorthand for a complex phenomenon. The point was that the balance between withdrawals and returns over time determines the outcome no matter what mechanics take place inside the portfolio to convert investments to withdrawals. I am disputing the idea that because withdrawals can be linked directly to interest and dividends paid out that the portfolio has somehow been immunized to the effects of too large withdrawal rates. Similarly I am pointing out that if the plan is safely conservative because interest and dividend linked withdrawals are also low withdrawal rates, then the cause to which safety can be attributed is low withdrawal rate and not that the linkage to income payout exists.

The one discussion that can be had is whether stock selection based on dividend income also produces an asset allocation that is inherently safer at the same withdrawal pattern (I acknowledge your point here) than other possible asset allocations. I contend that no one has demonstrated that this is so and that there may even be evidence that it is a less effective selection than others based on different grounds (ie that dividend portfolios are approximate but poor substitutes for value tilted portfolios that may be more efficient, although whether such efficiency leads to higher safe withdrawals appears to be unstudied territory [The actual efficiency as opposed to higher return of value tilting may also be largely unexplored territory although some back testing that has been posted here may support that for limited time periods.]). (Yes the grammatical construction of what just precedes this comment should be correct.)

[Wagnerjb]

IIRC, DFA published data showing that dividend investing is a form of value investing, and not the best form.

Very important distinction: no DFA study "shows" that dividend investing is a poor form of value investing. It merely says that in the sample they back-tested, it didn't seem to work very well. That doesn't mean it didn't work, it just means they couldn't attribute any outperformance to the strategy using the data they had. It also doesn't mean it won't/can't work in the future.

OK. Unless you have a valid statistical basis or economic basis for believing why the future won't be similar to the past, I don't see why relying on eight decades of data across a few dozen countries isn't logical.

The more important issue to me is whether you are incurring extra costs (ER, tax efficiency, etc) to tilt your portfolio. If you incur extra costs to tilt towards dividends (vs. a value tilt), then you better expect to generate outperformance (vs. the value tilt). I just don't see where those expectations of higher returns in a dividend tilt come from, since they certainly don't come from historical data.

Best wishes.

[BruceM]

Thank you for the responses. In retirement, the Vanguard article makes a case for a total return approach, as opposed to an income approach. Vanguard compares high dividend funds to low dividend funds; the conclusion is that the total return of low dividend funds may be greater.

During the past 12 years that I have been investing for income, I have yet to see a brokerage, wirehouse or investment manager have anything positive to say about the this approach to retirement income investing. I suspect the reason for this is that pure income investing, once investment dollars have been placed, generates no income for middlemen. For example, lets say at the beginning of this year, I have 1,000 shares each of SO, HCN, KO, PAYX and PM. In 2010 I'll collect about $10,150 in dividends, but I'll not pay a cent, directly or indirectly, in fees or expenses, charges or costs....nothing. How can a brokerage survive with people like me? Well, they probably wouldn't if very many of their accountholders did this. They rely on account trades, their share of MF fees and financial product sales. So it should come as no surprise that the industry would not support an 'income only' approach to providing retirement income.

However, Vanguard also says:

"In both scenarios, the yields were relatively stable, but the capital returns were volatile."

In other words, dividends are more stable than capital appreciation. Would someone in retirement not sacrifice a small decrease in return for less volatility? The Vanguard article is persuasive, but it doesn't address that question.

I think what Vanguard is hinting at is the importance of stability and reliability of income to the retiree....in particular the new retiree. I can't image too many worse ways to begin retirement than to have begun TR withdrawals in 2007. And I'd guess that this is what drives SPIA sales.

There is one other psychological reason not yet mentioned that might make the income approach to retirement income attractive. Most approaching retirement have spent their working years making the deliberate decision to save $X per year and accumulating this over their working years. How does anyone doing this just somehow automatically switch over to deaccumulating during the first year of retirement? There is no mental 'switch' we throw when we've made the decision not to go to work anymore....so we've got to mentally adjust to withdrawing, and to watching our account balance decline rather than grow. That can be tough adjustment, at least psychologically.

BruceM

[dbr]

However, Vanguard also says:

"In both scenarios, the yields were relatively stable, but the capital returns were volatile."

In other words, dividends are more stable than capital appreciation. Would someone in retirement not sacrifice a small decrease in return for less volatility? The Vanguard article is persuasive, but it doesn't address that question.

I think what Vanguard is hinting at is the importance of stability and reliability of income to the retiree....in particular the new retiree. I can't image too many worse ways to begin retirement than to have begun TR withdrawals in 2007. And I'd guess that this is what drives SPIA sales.

BruceM

If you want stable income you just elect withdrawals that are constant. Whether you "spend dividends" or "liquidate shares" the portfolio is still volatile unless you have elected different asset allocations. Asset allocation is a completely different decision, however. If you do elect a more stable asset allocation you will also have less expected return. The trade-off between the two is what makes all those retirement ruin studies complicated instead of obvious. One bad thing you can do is elect an asset allocation that is not diversified. One big mistake is to concentrate assets in investments that appear to deliver stable income streams but in fact are risky, non-diversified investments. A handful of dividend paying stocks would be a risky choice. Another risky choice is high yield alternative investments or other bad choices that deceive a person into spending too much money too soon.

[saurabhec]

I believe that Fama-French also found that low beta stocks tend to have lower volatility, relative to their return, than the market in general. I wouldn't be surprised if low beta stocks tend to be high dividend stocks.

The much quoted Fama-French value premium is based on a sort of Price/Book. The reason they used that is that it led to the highest value premium and was more consistent than using Price/Earnings or Price/Dividends. In fact I think Price/Dividends is the worst of the three.

I too have had an attraction for an equity strategy that would give more of its total return from dividends and I would even be prepared to sacrifice some expected return relative to a TSM strategy. However, in practice this does not work. I am in accumulation stage and prefer not to give up return for safety. By the time I get into withdrawal stage, the capital gains I would realize on switching my equity portfolio to a dividend yield oriented portfolio would effectively cancel out the benefit of switching to a dividend strategy. Anyway for someone making small withdrawals of the scale of 4-5% and having a portfolio that is 50% or more fixed income, the advantage of having the equity be in a dividend yield oriented portfolio is not as great as it might seem. One simply doesn't have to sell as much of the equity portfolio as one might think, and one has the ability to sell the fixed income during a horrible bear market year.

[Doug1]

The one discussion that can be had is whether stock selection based on dividend income also produces an asset allocation that is inherently safer at the same withdrawal pattern (I acknowledge your point here) than other possible asset allocations. I contend that no one has demonstrated that this is so and that there may even be evidence that it is a less effective selection than others based on different grounds (ie that dividend portfolios are approximate but poor substitutes for value tilted portfolios that may be more efficient, although whether such efficiency leads to higher safe withdrawals appears to be unstudied territory

Yes, I would agree with you that value investing historically has resulted in greater returns than dividend investing. However, the Vanguard article is about a total return approach versus an income approach. I would agree with Vanguard that an income approach may actually result in a lower aftertax return than a total return approach. I would also agree that a total return approach is more tax efficient than an income approach, resulting in a lower withdrawal rate being needed. I agree that dividend investing involves security selection. The diversity of your portfolio will probably decrease, as high dividend stocks tend to be concentrated in certain sectors, such as utilities. Also, there is always the concern that the reason a company has a high dividend is because of increased risk in the company; the dividend may be cut in the future.

However, dividends historically have been more stable than capital appreciation. For a retiree in 1929, an income approach would have been better than a total return approach. Perhaps the previously mentioned positive features of a total return approach outweigh this. If there is a study addressing this issue, I would like to see it.

P.S. Vanguard has had a high dividend fund since 2006. Actions speak louder than words.

[Doug1]

http://investment-fiduciary.com/about/d ... epression/

From 1929, it wasn't until 1945 that the stock market recovered. If you had invested in the top 30% dividend payers in 1929, it took 44 months to recover. Admittedly, dividends were considerably higher in 1929 than they are now. Nevertheless, it illustrates the principal.

[dbr]

However, dividends historically have been more stable than capital appreciation. For a retiree in 1929, an income approach would have been better than a total return approach. Perhaps the previously mentioned positive features of a total return approach outweigh this. If there is a study addressing this issue, I would like to see it.

The stability of dividends is the stability of one thing and the volatility of capital return is the (lack of) stability of another thing. Comparing the two doesn't mean anything. I hope there is not some bizarre hidden assumption here that if a person does not withdraw dividends that the alternative is that one withdraws one's capital appreciation each year. Nobody does that and it wouldn't even work as appreciation is negative in some years. What the withdrawal rate is matters, but not because that rate is or isn't dictated by yield or appreciation.

If a person is concerned about stability of an income stream, that investor can have exactly what he wants by just withdrawing the required income from the portfolio by any combination he wants of cashing dividend checks and selling shares. That might include selling negative shares by reinvesting dividends. Any withdrawal from a portfolio whether by liquidating shares or failing to reinvest dividends is withdrawal which is withdrawal which is withdrawal.

In the case of either cashing dividend checks or selling shares to withdraw identical amounts, the fate of the portfolio will be exactly the same unless the investment allocation is different in the two cases. If the investment allocation is different in the two cases then that is all about allocation and nothing about withdrawals. So far no evidence has been forthcoming that investing in dividend paying stocks provides more return at similar risk or less risk at similar return compared to some other efficient strategy, even in the case dividend paying really is a proxy for value investing, which apparently it probably mostly is not. Dividend stocks may be lower return, lower risk investments. In general we assume the investor has already arrived at the desired risk/return point not just by stock selection but by stock/bond allocation primarily. If dividend investing results in assuming diversifiable risk, then the effect will be negative.

[beyou]

Listen to recent earnings announcements, and some firms are going to decide if they should boost dividends depending if the US gov keeps div taxation low, or raises it. Same announcements said that if dividend
rates rise, they will instead use excess cash to buy back stock instead.
That helps shareholders by driving up prices, so you can sell later at lower
capital gains rates vs higher dividend rates.

Dividends vs share buy backs are just a mechanism to game the tax system.
Firms that consider both are not a better or worse investment depending on the outcome of that decision. In fact, having cash to make such a decision is a double edged sword. Good they earned it, but why doesn't management think they can grow the company by expanding capacity instead of paying dividends or buying back shares ? Dividends molify investors who want "income" but total return from a good company is what you should focus on.

I suspect if the dividend tax rates rise, lower dividend stocks will get a short term bump, and if they stay low then div paying stocks will get a short term bump, but in the long run it's business strategy that counts.
Just check out VG Total Stock (blend with higher and lower div stocks) vs VG Tax Mgd Cap Appreciation (lower dividend rate). Total return over long periods are almost identical. After tax returns would depend on gov policy regarding dividends, which is obviously subject to change.

[saurabhec]

The one discussion that can be had is whether stock selection based on dividend income also produces an asset allocation that is inherently safer at the same withdrawal pattern (I acknowledge your point here) than other possible asset allocations. I contend that no one has demonstrated that this is so ...

This is the reason why a dividend oriented equity portfolio had some attraction for me, but then I realized two things:

1) I did not want to tradeoff lower returns in accumulation phase for a safer equity portfolio in withdrawal stage
The tax consequences of switching at withdrawal stage made the choice one that had to be made sooner rather than later.

2) If measured against the portion of equity holdings sold from a 50/50 equity/fixed income portfolio at a 4% withdrawal rate split among equities and fixed income, even in a bear market even like 2008, the difference is not huge.
One might end up selling 2% more of the total return equity portfolio at worst (say a total return equity portfolio had a dividend yield of 2% and a dividend oriented portfolio had a yield of 4%, so one would have to sell 2% of the total return equity portfolio vs. 0% for the dividend oriented portfolio). That is not the end of the world. Plus one has the option to delay withdrawal from the equity portfolio in a bear market like 2008 and take the entire distribution from the fixed income side.

[beyou]

http://wallstreetpit.com/48849-blackroc ... ices-today

In it they say regarding BlackRock’s dividend:

“We have historically had a 40%-ish dividend policy, and we did buy back stock… We’re not a big user of capital, so we’re going to re-look at our February board meeting at our dividend policy. What we will be paying attention to is the government’s policy on the taxation of dividends. If they happen to raise the dividend taxation policy and dividends are less positive for our client base, we may have a larger component of share repurchases. If they extend the Bush tax cuts related to dividends, we would probably significantly raise their dividends.”

What I take from this, is, dividends will adjust to where they need to be depending on taxation policy. There will be period when dividend payers are attractive, but as you can see here, a smart CEO knows to pay more or less based on market conditions (and tax policy more specifically).
That does not change the long term investment value of a stock.

[tetractys]

Dividend paying equities are more preferable when little or no income taxes have to be paid on them. So we might see more railing against dividend paying equities, and more rooting for non-dividend paying growth equities, from higher tax bracket individuals. -- Tet

[Kevin M]

I also agree that total return may not be as important to a retired person who might need the income to stay off a dog food diet. Dave

Dave, I don't get that. Seems to me that total return is all that matters. I can generate income by selling equities if I need to.

Your investment objective really depends on what you're trying to accomplish.

For most retirees, their investment objective is income, not total return (TR).

This may be true, but I think having income as an objective is based on incomplete understanding of finance. What we really need is cash flow, not income. My cash isn't generating much income, but it's helping with the cash flow.

I'm retired, and my goal is to have enough money to live on for the rest of my life, and my objective is to achieve that in a rational manner. So, I mostly try to invest based on my understanding of the academic research (admittedly with many exceptions), tempered with common sense. I simply don't see any theoretical justification for heavily over-weighting dividend paying stocks (whether held individually or in a fund), just because the dividends are classified as income.

Having said that, having fairly steady dividend and interest income makes me more comfortable (I'm retired), especially when stocks tank.

And this is one of the distinct advantages to a retiree to invest for a reliable income stream through income (dividend, interest and distributions) paying securities.

Agreed, but this is more due to the emotional part of my brain than the rational part. I work hard to use the rational part to keep the emotional part in check, but was just acknowledging that the emotional part still is highly active at times. Also, bonds and cash are much more significant in providing cash flow and stabilizing my portfolio than are dividend paying stocks.

Kevin